Banking.

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Yes, The Market's Heading Down, But, Then Again, So Are Mortgage Rates

September 02, 1998|By Robert Heady.

Send up a small flare. The upside of all the bad economic news, such as the Russian ruble devaluation and the Japanese economy, is that long-term bond yields are down.

And when that happens, they take mortgage rates down with them.

Rates are now at 25-year lows, say the pundits. That means it's time once again to hold up your mortgage plans in front of a mirror and ask yourself: "Should you or shouldn't you buy or refinance?"

You probably should. But if you can't right now, don't sweat it. There's enough economic and political commotion happening around the world to keep rates low for a while. Maybe a long while, according to some analysts who see more deflation than inflation on the horizon.

First, I don't know where the experts get that "lowest-in-25-years" jazz. The typical 30-year fixed-rate loan was under 6.6 percent in October 1993, whereas as of this writing it's about 6.8 percent. But let's not ride those guys too hard. The question is, how do you pounce on today's low numerals and start saving some money?

- Which kind of mortgage should you get? Besides the standard 30-year and 15-year fixed-rate loans, and the one-year adjustable rate (ARM), more mortgage varieties have begun to appear. Savvy home buyers know by now that a fixed rate is the way to go if you plan to live in the home for five years or longer, while ARMs are best for people who get the itch to move out after a couple of years.

- How should you look at rates? Fixed and ARM rates today are so close, says Wayne Katz, of Mortgage Express, "that it's ridiculous to consider anything but a fixed rate."

Moreover, he adds, "mortgage rates should even be lower--in the 6.5's and 6.6's. The reason they aren't is, the industry is holding back, waiting to see if the Russian ruble problem is for real." Translation: If it is, rates will fall by another one-quarter percent.

Two hot options are 5/1 and 7/1 mortgages, where you lock in a fixed rate for five or seven years, then switch to whatever ARM rate exists at that time, plus a cap. While the start rates will be a tad above the standard ARM, they're nevertheless cheaper than a 30-year fixed. That makes these loans ideal for folks who don't plan to remain in their home for many years or who expect their future income to grow.

For example, Countrywide Mortgage in Atlanta on Aug. 26 was charging new home purchasers an opening rate of 6.5 percent with no points on both the 5/1 and 7/1, compared with 6.625 percent for 5/1-plan refinancers and 6.75 percent on 7/1 refis. But don't be dazzled by numbers alone.

The biggest mistake mortgage customers make? "Listening to just the rates, instead of understanding what they're really getting," says Joe Bova, executive vice president of Fidelity Federal in West Palm Beach, Fla. Does everyone read the disclosure documents they're given by their bank? "They should," Bova emphasized.

It's easier to qualify for a loan these days, but your credit profile will dictate your cost. Here's why:

Mortgage insiders say that Fannie Mae and Freddie Mac, the two agencies that buy up mortgages in the secondary market, are responsible for huge new profit pressure in the industry. The agencies like to buy up loans from squeaky-clean "A" or "A-minus" credit risks, said one banker, and that's pushed lenders toward making more loans to riskier people with "B," "C" or even "D" credit.

It has broadened the market for lenders, but driven up mortgage rates for the less creditworthy who may pay one or two percentage points higher on a loan. "If we can't make it on the A's, we'll make it on the B's, C's and D's," said the banker.

- What will I have to shell out in fees and closing costs? This varies by institution and the competitive marketplace, but a modest rule of thumb is 2 to 3 percent of the loan amount. Always try to negotiate a better deal with the lender.

- Suppose I'm a first-time home buyer with not much cash to my name? Try Fannie Mae's new "Flexible 97" program, which charges a market rate for a 30-year fixed-rate mortgage, but has a minimum 3 percent down payment. That money can come from a confirmed gift or a family loan, whereas under other low-down-payment programs, the 3 percent must be your own cash. Also, with Flexible 97 the seller can contribute up to 3 percent of the total mortgage amount toward your closing costs. In other words, if the costs are $3,000 on a $100,000 loan, you wouldn't have to put up any closing money.

For details, call Fannie Mae at 800-732-6643.

- Credit tip. You may not be accepted for a credit card if you already have several. The issuer may decide, even if you do not carry a balance, you have too much credit available.

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Robert K. Heady is the founding publisher of Bank Rate Monitor and is the co-author of the book, "The Complete Idiot's Guide to Managing Your Money." You can write to him in care of this newspaper or send e-mail to jrnl8888@aol.com.